The Employee Retirement Income Security Act (ERISA) hit the Big 4-0 last year and prompted many employers and retirement plan industry members to wonder if the law is 40 and fabulous or suffering a mid-life crisis!
Clearly, the law enacted by President Gerald Ford on Labor Day in 1974 was necessary to protect employee retirement benefits. Some 10 years earlier, many Americans were shocked and saddened when the Studebaker-Packard Corporation shut down and paid out only a slight percentage of the pensions due its workers.
At the onset, ERISA set minimum standards for protecting retirement income plans and shifted the landscape from defined benefits to defined contributions. That shift was not tiny; it was momentous. Employees, not employers, were now responsible for retirement income planning and saving.
However, putting the power in the hands of the individual created lots of questions, because just how were employees supposed to adequately save and how were employers supposed to help? Those questions and more have prompted some 50 updates to ERISA over the years.
Both the original law and the updates are complex and require oversight by the Department of Labor’s Employee Benefits Security Administration, and the Treasury Department’s Internal Revenue Service and the Pension Benefit Guaranty Corporation. Weeding through 40 years of law, we find the following key points and stipulations:
• Original ERISA law separates employer-sponsored retirement saving plans into two categories: defined benefits and defined contributions.
• The Revenue Act of 1978 formalizes 401(k) plans and in 1980 the IRS section 401(k) becomes law.
• The Retirement Equity Act in 1984 protects retirement saving plans for spouses and dependents.
• The 2006 Pension Protection Act (PPA) creates some of the most recent widespread changes including:
o Disclosure requirements by plan administrators for all plan participants.
o A permanent “Savers Credit” and other retirement savings incentives.
o Auto enrollment safe harbor employer matching contribution rules.
o Rules governing investment advice for defined contributions by advisors.
o Full sanctioning of cash-balance plans.
At 40, ERISA is now a very complex and often hard-to-understand document. (For a full overview of the History of ERISA, check out the Evolution of ERISA.)
While the marvelous features are indeed there, many mid-life changes still need to take place in order to make retirement planning and saving easier for participants and plan sponsorship less complex for employers.